If you don’t follow Dana Lyons on Twitter you should. The guy tweets some thoughtful analysis of technical and market sentiment without a whole heck of a lot of bias. This morning Dana posted a chart about waste stocks:
— Dana Lyons (@JLyonsFundMgmt) March 18, 2016
That got me thinking about stocks that haven’t participated in the broad market’s recent run.
Yesterday shares of Micron (MU) caught my eye as it appeared that a trader rolled down some calls in size. When the stock was $10.70, 10,000 of the April 12 calls were sold to close at 26 cents, and 10,000 of the April 10 calls were bought to open got $1.17.
Looking at the 1 year chart, MU’s 15% rally off of the recent 52 week lows was certainly better than than that of the S&P 500 and the Nasdaq’s ~13% gains from their February lows, but well below the Philadelphia Semiconductor Index’s 20% gains in the same period. For a stock that is down 63% from its 52 week highs, down 23% on the year, with a beta to the SPX of 1.7, the stock’s recent 15% rally is kind of pathetic vs its peers and the broad market.
MU is scheduled to report their fiscal Q2 results on March 30th. Recent price action suggests that sentiment towards the stock is poor at best, yet it appears that Wall Street analysts have yet to capitulate on the stock with 22 Buy ratings, 7 Holds and only 2 Sells with an average 12 month price target of $16.50.
If I were looking to play for a squeeze into and out of earnings, MU could fit the bill. But I would absolutely look to define my risk, as the trader did yesterday, stopping my losses just below $10. On the chart, $10 looks like the only real long term support until much lower:
That said, it’s important to look at what the options trader is buying. The April 10 calls, that expire in a little less than a month are about 11% of the stock price. The right to own MU at $10 on April expiration costs you 11%. Ok well a good portion of that premium is intrinsic with the stock at $10.70 at the time of trade, but it’s interesting from a sentiment standpoint that if the stock were below $10 in a month (back where it was trading a few weeks ago) the trader would lose 11% of the stock price. But… these calls have a 70% probability of being in the money on April expiration.
As an alternative to the in the money call detailed above, one might look at a near the money call. As of yesterday’s close at $10.87 the MU April 11 calls closed at 65 cents. These calls break-even at $11.65, up about 7% from current levels, risking about 6% of the underlying stock price. While you would be risking less, you have a far lower chance of actually breaking even than in the prior example, less than 50%.
Why go to the trouble to debate this options trade? Well, it appears investors are reaching for stocks, with many seriously under-performing the broad market or their benchmarks. One of the primary uses of options is for leverage. We highlight unusual activity, not because we believe it is worth following blindly, but because it can be a great sentiment gauge, as in the case of the MU trade discussed. What is someone willing to risk, over what period of time given clear cut probabilities? That’s always of interest to me as an input when I am evaluating a stock or etf for a directional move.